OECD
EconomicOutlook
Randall S. Jones
Head, Japan/Korea DeskNovember 2014

The global economy is stuck in low gear
World GDP growth
Per cent, seasonally-adjusted annualised rate
8866442200-2-2-4-4-6-8-6

Average (1995-2007)

Source: Preliminary November 2014 Economic Outlook database.

-82

Trade growth has been weak
Trade intensity1Index, 1990=100
United States

Trend (1990-2007)

Japan

350

350

300

300

250

250200

200

150

150

100

1005050350European Union

BRIICS

350

300

300

250

250200200

150

150

1001005050

1. Index of sum of exports and imports as a ratio of GDP.
Source: Preliminary November 2014 Economic Outlook database.

3

Labour market: divergent performance,but overall slack remains
Unemployment rate

Number of unemployed persons

Per centMillions
14 60

141210

United States

Euro area

Japan
11.5

12 50
1088

6

6

5.8

4
204
3.660
Other OECD

USA

Euro area

50

40

17 million

30
2040
30

14 million

10 million

20

7 million

21000

18 million

1012 million

0Source: Preliminary November 2014 Economic Outlook database.

4Demand patterns are diverging
in major advanced economies

1201101009080

Non-residential investment
per capita

Private consumption
per capita

Index, 2005 = 100Index, 2005 = 100

United States

Euro area

Japan120115

United States

Euro area

Japan115

110

110

105

105

100

10095

95909085

85

1101009080

Source: OECD national accounts database; Preliminary November 2014 Economic Outlook database; and OECD calculations.
.

5Trends are also diverging
among emerging economies
GDP per capita
Volume, 2005=100240
220

240
China

220

200

200

180

180

160
140

India
Russia

120
100
80160
140120Brazil10080.Source: OECD National Accounts database; Preliminary November 2014 Economic Outlook database; IMF WEOdatabase; Central Statistical Organisation, India; and OECD calculations.

6Growth projections for 2015-16
GDPVolume, percentage change

Column1
World

2013
3.1

2014
3.3

2015
3.7

2016
3.9

United States
Euro areaJapan
ChinaIndia
BrazilRussia

2.2
-0.4
1.5
7.7
4.7
2.5
1.3

2.2
0.8
0.4
7.3
5.4
0.3
0.3

3.1
1.1
0.8
7.1
6.4
1.5
0.0

3.0
1.7
1.0
6.9
6.6
2.0
1.6

Source: Preliminary Economic Outlook (EO) projections.

7Growth projections for 2015-16
GDP growth
Per cent
8765432

7.1 6.9

8
6.6

6.4

7
5.9

6

5.2

3.94.2

4.1

3.8

3.9
3.7

4.0
3.25

2015
3.13.0 2.7

3.0
2.5 2.62.4 2.5

2.9
2.1

1

1.71.9

2.0

1.5

1.8
1.1

1.7
1.1

1.5

0.81.0 0.8

3
1.6

1.0
0.204

2016

210

0.0-1

Source: Preliminary November 2014 OECD Economic Outlook database.

8

The threat of euro area stagnation has risenInflation

GDPHIPC, 12-month percentage change

Year-on-year percentage change

3.553.042.5

32.0
1.5
1.0

2
10.5

00.0

-1-0.5-2

Note: Shaded bands show +/- one standard deviation based on past variation.
Source: Preliminary November 2014 Economic Outlook database.

9The strong net portfolio inflows to emerging
economies could reverse
Cumulative net portfolio inflows to BRIICS excluding China
Per cent of GDP, from Q1 2006
77

6

6

5

5

4

4

3

3

2

2

1

1

0

0

-1

-1

Source: IMF Balance of Payments database; OECD National Accounts database; and OECD calculations.
10Advanced economy debt levels are highand credit growth in China is rapid
China: credit to non-financial private
sectorDebt excluding the financial sector
Per cent of GDP
500
400500Government
HouseholdNon-financial corporations

180
400

300

300

200

200

100

1000200

2007 20132007 20132007 2013

UnitedStates

Euro area

Japan0Per cent of GDP
Bank lending

Non-bank credit

200
180

160

160

140

140

120

120

100

100

80

80

60

60

40

40

20

2000

Source: Preliminary November 2014 Economic Outlook database; ECB; OECD Financial accounts; and BIS.
11Potential growth rates could fall furtherPotential GDP growth
Annual average, per cent1212

1998-2002

2003-2007

2008-2014

1010886644220

United States

Euro area

Japan

China

India

Brazil0

Source: Preliminary November 2014 OECD Economic Outlook database.
12Key messages
Global growth is modest, with widening differences acrosscountries
Financial risks are rising and volatility is set to increase

Potential growth has slowed, interacting with weak demand

Weakness in the euro area is a major concern

Monetary, fiscal and structural policies must all be employed toaddress risks and support growth
13Monetary, fiscal and structural policies
need to support growth
Monetary policy needs to remain accommodative in mostcountries, and more aggressive QE is needed in the euro area

Fiscal consolidation has progressed significantly, leaving roomin many economies to slow the pace of adjustment

Ambitious structural reforms are needed to boost investment,
trade and job creation

Significant efforts by G-20 countries to develop comprehensive
growth strategies for the Brisbane summit are welcome
14

JAPAN15

Short-term economic projections1
Percentage changes
2012

2013

2014

2015

2016

1.5

1.50.40.8

1.0Private

2.0

2.0

-0.9

1.0

1.2

Government

1.7

2.0

0.3

0.3

0.5

3.5

2.6

3.7

-1.0

-0.5

Public2

3.1

11.3

4.8

-6.8

-17.7

Residential

3.0

8.8

-4.0

-1.5

3.6

Business

3.7

-1.5

5.1

1.0

4.0

Final domestic demand

2.3

2.1

0.3

0.4

0.7

Stockbuilding3

0.1

-0.3

0.1

0.0

0.0

Total domestic demand

2.3

1.9

0.4

0.4

0.7

Exports of goods and services

-0.2

1.6

7.8

6.2

6.7

Imports of goods and services

5.3

3.46.93.2

4.6

Net exports3

-0.9

-0.3

-0.1

0.4

0.3

Demand and output (volumes)
GDPConsumption

Gross fixed investment

1. Excluding the second tax hike, which was delayed to 2017.
2. Including public corporations.
3. Contribution to GDP growth.
Source: OECD Analytical Database and OECD estimates and projections.

16

Business confidence remains high in the Tankan
Survey¹

1. Diffusion index of ''favourable'' minus ''unfavourable'' conditions. Large enterprises are capitalised at a billion yen or more and small
enterprises at between 20 million yen and a 100 million yen. Numbers for the fourth quarter are companies' projections made in September
2014.
Source: Bank of Japan.

17Nominal wage increases have not kept pacewith inflation
Year-on-year per cent changes¹

1. Total cash earnings (including bonuses). Data are three-month moving averages.
Source: Ministry of Health, Labour and Welfare, OECD calculations and Bank of Japan.

18

Short-term economic projections
In per cent
2012

2013

2014

2015

2016

GDP deflator

-0.9

0.6

1.6

1.7

1.4

CPI1

0.0

0.4

2.9

1.8

1.6

Core CPI1,2-0.5

-0.1

1.9

1.61.6

Unemployment rate

4.3

4.0

3.6

3.5

3.5

Output gap

-0.7

0.2

-0.2

-0.2

0.0

World trade growth

3.0

3.3

3.0

4.5

5.5

Net government lending (% of GDP)

-8.7

-9.0

-8.3

-7.3

-6.3

Net primary balance (% of GDP)

-7.8

-8.1

-7.2

-6.2

-5.4

Gross debt (% of GDP)

216.5

224.2

230.0

232.8

236.7

Net debt (% of GDP)

129.4

137.2

142.9

146.8

149.6

Household saving ratio (%)

1.3

0.4

1.8

1.9

1.8

Current account (% of GDP)

1.1

0.7

0.1

0.91.4

Inflation and capacity utilisation

Memorandum items:

1. Including the impact of the consumption tax hike from 5% to 8% in April 2014.
2. The core CPI is the OECD definition, which excludes both food and energy.
Source: OECD Analytical Database and OECD estimates and projections.

19

The first arrow of Abenomics: bold monetary
policy with Quantiative and Qualitative Easing
Central bank assets
Per cent of GDP

605040

United States
Euro area
Japan60
50403030

2020

101000Source: Datastream; National Central Banks.

QQE has boosted inflation expectations and pushed underlying inflation into
positive territory in late 2013.
However, inflation, which had risen to 1½ per cent (year-on-year) prior to
the tax hike, slowed to around 1% in late 2014 (excluding the tax hike).
The BoJ’s “quantitative and qualitative monetary easing” is now increasing
the monetary base at an annual pace of about 80 trillion yen per year.

20Inflation has fallen since early 2014
Year-on-year percentage change

Source: OECD Economic Outlook 96 and Bank of Japan.

21

The second arrow of Abenomics:
flexible fiscal policy
Improvement in underlying primary balance
Per cent of potential output
776from 2009 to 2014

65from 2014-to 2016

5443

32

21

10

United States

Euro area

Japan0Source: Preliminary November 2014 Economic Outlook database.

Despite the 2014 tax hike, there was no fiscal consolidation
over 2010-14, in part due to the 2011 Great East Japan
earthquake.
A small amount of consolidation is expected in 2015-16, due tospending cuts.
Japan must continue to address its fiscal challenges.

22Total spending and social welfare spending in Japan

Source: OECD Analytical Database.

23

Japan's public debt has soared during the past 20 years¹
Primary budget balance on a general government basis

1. OECD estimates for 2014 and projections for 2015-16.
Source: OECD Economic Outlook 96.

24

Japan's public debt has soared during the past 20 years¹
Gross public debt on a general government basis

1. OECD estimates for 2014 and projections for 2015-16.
Source: OECD Economic Outlook 96.

25

The third arrow ofAbenomics: a growthstrategy that encourages
private-sector investment

Living standards in Japan have fallen relative to the top
half of the OECD

1. Per capita GDP using 2013 PPP exchange rates.
2. GDP per hour of labour input.
3. Total number of hours worked per capita.
Source: OECD Going for Growth Database.

27

Japan’s share of world exports has been falling during thepast 20 years

Source: WTO Database.

28

Japan’s potential GDP growth rate has fallen sharply since2012

1. The 2% target was set in 2009 and maintained by subsequent governments.
2. Average annual GDP growth in real terms in Japan between 1990 and 2012.
Source: OECD Potential Output Database.

29

Average labour productivity growth1 in Japan is alreadynear the OECD average
Average annual growth rate over 2000-13

1. Real GDP divided by total employment (including self-employed).
Source: OECD Economic Outlook Database.

30

The level of total factor productivity in non-manufacturing
has declined since 1991

Source: Japan Industrial Productivity Database 2013.

31

Investment in knowledge-based capital
Per cent of GDP in OECD countries, 2010 or latest year available

Source: Corrado et al. (2012).

32

Investment in knowledge-based capital
Contribution to the growth in labour productivity, 1995 to 20071

1. Annual average growth rate from 1995 to 2007 of output per hour worked.
Source: Corrado et al. (2012).

33

Policies to boost output growth
toward the government’s 2% target

1. Improve framework conditions• Corporate governance• Product market regulations• International competition (FDI, EPAs, TPP)

• Labour mobility

Japan lags behind frontrunners in overall productmarket regulation in 20131

1. The OECD Indicators of Product Market Regulation are a comprehensive and internationally-comparable set of indicators that measure the degreeto which policies promote or inhibit competition. Research shows that the indicators have a robust link to performance. The indicator, based on
more than 700 questions, ranges from zero (most relaxed) to three (most stringent).
Source: OECD Product Market Regulation Database and Koske et al. (2014).

35

The number of bankruptcies in Japan isfalling

Source: SMEA (2014), ADB National Accounts Database, and OECD (2014),Science, Technology and Industry Scoreboard.

36

The number of bankruptcies in Japan has fallen since2008 despite two crises

Source: SMEA (2014), ADB National Accounts Database, and OECD (2014),Science, Technology and Industry Scoreboard.

37

Credit guarantees for SMEs in Japan are
exceptionally highStock of guarantees as a per cent of GDP in 2010

Source: OECD (2013), Financing SMEs and Entrepreneurs 2013: An OECD Scoreboard, OECD Publishing.

38

International comparison of barriers to trade andinvestment in 20131

1. The OECD Indicators of Product Market Regulation are a comprehensive and internationally-comparable set of indicators that measure the degree
to which policies promote or inhibit competition. Research shows that the indicators have a robust link to performance. The indicator, based on morethan 700 questions, ranges from zero (most relaxed) to three (most stringent).
Source: OECD Product Market Regulation Database and Koske et al. (2014).

39

Japan’s stock of inward and outward investment
is low in 2013

Source: OECD Foreign Investment Database.

40

It is important to address the factors limiting
inflows of foreign direct investment
1.
2.
3.
4.
5.
6.

Low level of corporate mergers and acquisitions (M&As): the 2007 law tofacilitate “triangular mergers” has not been effective.
The tax system: a high corporate income tax rate and the short “netoperating loss period” discourages FDI inflows.
Corporate governance: Japan’s corporate governance framework lagsbehind global standards and the lack of clarity and accountability
discourages potential investors.
The regulatory environment: Unclear administrative practices andunique and rigid standards for certifying consumer goods in Japan are a
deterrent to FDI inflows.
Employment: Japan needs to enhance the flexibility of employment as thelack of mid-career mobility makes it difficult for foreign firms in Japan tosecure experienced workers.
Entry of foreign workers: Given that FDI is also facilitated by themovement of people, rules that restrict the entry of workers candiscourage foreign investors.

The Producer Support Estimate1 for Japan is thesecond highest in the OECD

1. Producer support is the annual monetary value of gross transfers from consumers and taxpayers arising from policies that support agriculture,
regardless of their nature, as a per cent of the value of gross farm receipts. Countries are ranked according to their 2011-13 levels. Chile, Israel
and Slovenia excluded from the OECD total in 1986-88. The EU figure is the EU12 for 1986-88 and the EU27 for 2011-13.
Source: OECD PSE/CSE Database 2014.

42Japan’s farm workforce is elderly
The age distribution of rice farmers in 2010

Source: Ministry of Agriculture, Forestry and Fisheries (2010).

43

Total factor productivity growth and business
R&D intensity
1995-2010

Source: OECD Analytical Database; OECD Long-term Scenario Database; OECD Main Science and Technology Indicators.

44

Policies to boost output growth
toward the government’s 2% target

2. Improve the innovation framework• Upgrade the quality of universities• Expand international linkages• Enhance the role of universities

Comparative performance of national science andinnovation systems in 2014

Note: Normalised index of performance relative to the median values in the OECD, which are set at 100. The top performer is set at 200 and the lowest at zero.
The fifth-highest performer in the case of the “Top 500 universities” had a score of 137 relative to the OECD median, while the fifth lowest had a score of 5.
Japan, with a score of 43, was in the middle range.
Source: OECD (2014), OECD Science, Technology and Industry Outlook 2014, OECD Publishing, Paris.

46

Flows of R&D funds in 2011
A. R&D funding
Allocation of R&D spending by sector performing it
Share of total R&D
spending

GovernmentUniversitiesBusinessenterprises

Total

17.2
5.8
76.5
0.5

53.5
0.4
0.7
7.1

41.4
99.4
0.5
1.3

5.1
0.2
98.8
91.7

100.0
100.0
100.0
100.0

1

Government
Universities
Business enterprises
Foreign sources

B. Sector performing R&D
Funding source for R&D performed
Share of total
R&D
performed

Government

Universities

Businessenterprises

Foreignsources

Total

9.8
13.2
77.0

93.9
54.0
1.1

0.3
43.3
0.0

5.5
2.7
98.3

0.3
0.0
0.6

100.0
100.0
100.0

1

Government
Universities
Business enterprises
1. Includes private non-profit institutes.
Source: OECD R&D Statistics Database.

47

Increase in R&D performed in universities inJapan has lagged behind other OECD countries
The increase between 2000 and 2012 (or latest year) in real terms

Source: OECD R&D Statistics Database.

48

The share of non-regular workers is rising¹

1. Data are for February for each year through 2001 and for the first quarter since 2002.
Source: Ministry of Internal Affairs and Communications, Labour Force Survey.

49

There are large income gaps between
regular and non-regular workers

Source: Ministry of Health, Labour and Welfare, 2014 White Paper on Labour Economics.

50

The fertility rate has fallen while female
labour force participation has risen

Source: 2013 OECD Economic Survey of Japan.

51

The employment ratio for women with
university degrees1 in 2012

1. Including other types of tertiary education.
Source: OECD Employment Outlook, 2014.

52

Increasing female employment can help
avoid looming labour supply shortages
Projected size of the labour force in thousands of people1
65 00053Female participation rate increases
to converge with male rate by 2030

60 000.

55 00050 000Male and female labour force participationrates remain at levels observed in 2011

45 0001. Based on population projections for persons aged 15-64 years and assuming that the labor force participation rate for men remains constant from 2011 to 2030.
Source: OECD (2014), “Japan – Advancing the third arrow for a resilient economy and inclusive growth”, Better Policies Series, OECD Publishing, Paris, April,
http://www.oecd.org/japan/2014.04_JAPAN_EN.pdf

54